authID Inc

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

In the opinion of Management, the accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which we considered as necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for future periods or the full year.

The condensed consolidated financial statements include the accounts of authID Inc. and its wholly-owned subsidiaries MultiPay S.A.S., ID Solutions, Inc., FIN Holdings Inc., Ipsidy Enterprises Limited and authID Gaming Inc. (collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

Going Concern

As of June 30, 2024, the Company had an accumulated deficit of approximately $165.8 million. For the three and six months ended June 30, 2024, the Company earned revenue from continuing operations of approximately $0.3 million and $0.4 million, used approximately $2.8 million and $5.7 million to fund its operations, and incurred a net loss of approximately $3.3 million and $6.3 million.

The continuation of the Company as a going concern is dependent upon financial support from the Company’s stockholders, the ability of the Company to obtain additional debt or equity financing to continue operations, the Company’s ability to generate sufficient cash flows from operations, successfully locating and negotiating with other business entities for potential acquisition, and acquiring new clients to generate revenues and cash flows. In June 2024, the Company raised approximately $10.0 million after expenses from existing and new stockholders through the sale of Common Stock pursuant to a registered direct offering. Going forward, the Company plans to raise additional funds to support its operations and investments as it seeks to create a sustainable organization. Our growth-oriented business plan to offer products to our customers will require continued capital investment and there is no guarantee that such financing will be available, or available on acceptable terms.

There is no assurance that the Company will ever be profitable. These unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. As there can be no assurance that the Company will be able to achieve positive cash flows (become cash flow positive) and raise sufficient capital to maintain operations, there is substantial doubt about the Company’s ability to continue as a going concern.

Reclassification

Certain prior year expenses have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the previously reported loss from continuing operations and management does not believe that this reclassification is material to the consolidated financial statements taken as a whole. Specifically, for the three and six months ended June 30, 2023, we reclassified approximately $64,000 and $93,000, respectively, in expenses from research and development expenses to general and administrative expenses.

Net Loss per Common Share

The Company computes net loss per share in accordance with FASB ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the statement of operations. Basic EPS is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. The following potentially dilutive securities were excluded from the calculation of diluted loss per share for the three and six months ended June 30, 2024 and 2023 because their effect was antidilutive:

Revenue Recognition

Software License– The Company recognizes revenue based on the identified performance obligations over the performance period for fixed consideration and / or variable fees generated. Variable fees are typically earned over time based on monthly users, transaction volumes or a monthly flat fee rate. We allocate the selling price in a contract which has multiple performance obligations based on the contract selling price that we believe represents a fair market price for the service rendered based on estimated standalone selling price. Transaction fees are billed monthly and are constrained to transactions incurred within the month.

For contracts with minimum annual fees, the Company generally recognizes the amount of revenue ratably over the contract year and records contract assets for the amount in excess of monthly contract billings relating to variable contract consideration. For certain contracts, the Company enters into an agreement which stipulates a minimum annual fee which is generally due at the end of the contract year, in excess of the amount of monthly billings. The Company may also require milestone payments of the minimum annual fee. The amount of any billed fees in excess of revenue recognized is recorded as deferred revenue.

Any usage-based fees in excess of the minimum contract amount are charged to the customer and allocated to the annual period in which they are earned under the contract. At the beginning of each annual period in the contract, the Company estimates the variable amounts for the annual period subject to the constrained variable consideration (usage-based fees) and recognizes that amount on a time-elapsed basis over the annual period. At each reporting date within an annual period, the Company reassesses its estimate of the excess variable amounts for the annual period and updates the amount recognized on a time-elapsed basis over the remainder of the annual period.

The Company had deferred revenue contract liabilities of approximately $244,000 and $132,000 as of June 30, 2024 and December 31, 2023, respectively, for certain revenue that will be earned in future periods. All deferred revenue contract liabilities as of June 30, 2024 are expected to be earned over the next twelve months.

Concentration of Revenue and Accounts Receivable

For the six months ended June 30, 2024, two customers represented 59% of revenue, respectively. For the six months ended June 30, 2023, one customer represented 47% of revenue. For the three months ended June 30, 2024, three customers represented 76% of revenue, respectively. For the three months ended June 30, 2023, one customer represented 51% of revenue. As of June 30, 2024, three customers accounted for 80% respectively, of accounts receivable. As of December 31, 2023, two customers accounted for 67%, respectively, of accounts receivable.

Remaining Performance Obligations

As of June 30, 2024, the Company’s Remaining Performance Obligation (RPO) was $4.24 million, of which $0.24 million is held as deferred revenue and $4.00 million is related to other non-cancellable contracted amounts. The Company expects approximately 36% of the RPO to be recognized as revenue over the next twelve months ending June 30, 2025 based on contractual commitments and expected usage patterns. However, the amount and timing of revenue recognition are generally dependent upon customers’ future consumption, which is inherently variable at customers’ discretion. Furthermore, the Company does not have sufficient historical information to estimate the recognition of revenue due to its current operations and has approximated such amount based on discussions with the contracted parties.

Deferred Contract Costs – We defer the portion of sales commission that is considered a cost of obtaining a new contract with a customer and amortize these deferred costs over the period of benefit. We expense the remaining sales commissions as incurred. The following table summarizes deferred contract cost activity for the six months ended June 30, 2024:

NOTE 2 – OTHER CURRENT ASSETS

Other current assets consisted of the following at June 30, 2024 (unaudited) and December 31, 2023:

NOTE 3 – INTANGIBLE ASSETS, NET (OTHER THAN GOODWILL)

The Company’s intangible assets primarily consist of acquired and developed software that is being amortized over their estimated useful lives as indicated below. The following is a summary of activity related to intangible assets for the six months ended June 30, 2024 (unaudited):

The following is a summary of intangible assets as of June 30, 2024 (unaudited):

Amortization expense totaled approximately $87,000 and $152,000 for the six months ended June 30, 2024, and 2023, respectively.

Future expected amortization of intangible assets is as follows:

There were no impairment indicators noted with respect to Company’s long-lived assets, including intangible assets, as of June 30, 2024.

NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following as of June 30, 2024 (unaudited) and December 31, 2023:

NOTE 5 – RELATED PARTY TRANSACTIONS

Board of Directors

On February 15, 2024, Mr. Joe Trelin tendered his resignation as Chairman and a Director of the Company, effective immediately. On February 20, 2024, the board of directors of the Company (the “Board”) accepted his resignation and agreed to vest the unvested portion of an option granted to Mr. Trelin on June 28, 2023, amounting to 6,511 shares.

On March 25, 2024, Mr. Kunal Mehta was appointed as a Director of the Company, upon the standard terms for non-employee Directors. On May 20, 2024, Mr. Mehta was granted an option to purchase 13,282 shares of common stock at an exercise price of $7.78 per share.12,500 of the shares vest annually in equal amounts over a three-year period commencing in 2025 and 782 shares vested monthly in equal amounts over a three-month period commencing March 2024.

Commercial Agreements

On June 6, 2023, the Company entered into a services agreement with The Pipeline Group, Inc. (“TPG”). Ken Jisser, a director of the Company, is the founder and CEO of TPG, a technology-enabled services company that aims to deliver business results for companies looking to build a predictable and profitable pipeline. As of June 30, 2024, the Company held a balance of approximately $117,000 in prepaid expenses related to this service agreement. In June 2024, the agreement with TPG was renewed for an additional year at a reduced fee rate of $70,000 per month. Total expense incurred under this contract during the three and six months ended June 30, 2024 was approximately $285,000 and $542,000, respectively. Total expense incurred under this contract during the three and six months ended June 30, 2023 was approximately $67,000 and $99,000, respectively.

Employment Agreement

Since June 2023, the Company has employed Dale Daguro, the brother of our CEO, Rhon Daguro as a VP Sales. Dale Daguro’s employment is at will and may be terminated at any time, with or without cause. On July 12, 2023, Dale was granted an option to purchase 25,000 shares of common stock at an exercise price of $7.36 and on December 21, 2023 he was granted a further option to purchase 4,000 shares of common stock at an exercise price of $9.25 per share. Dale’s compensation is commensurate with other executives employed by the Company at a similar level of seniority and experience. During the six months ended June 30, 2024, Dale Daguro earned approximately $148,000 in base salary and sales commission.

Issuance of Common Stock

On June 27, 2024, Michael Thompson, a Director of the Company purchased 12,254 shares of the Company’s common stock at an aggregate price of $100,000, as part of the Company’s Registered Direct offering (See Note 6 – Stockholders’ Equity).

NOTE 6 –STOCKHOLDERS’ EQUITY

Common Stock

On June 27, 2024, pursuant to Securities Purchase Agreements in a Registered Direct Offering, the Company issued 1,464,965 shares of common stock for cash gross proceeds of approximately $11.0 million (or approximately $10.0 million, net of offering costs).

During the six months ended June 30, 2024 the Company issued 5,666 shares of common stock, upon the cashless exercise of a stock option.

During the six months ended June 30, 2023, shares of common stock were issued as a result of the following transactions:

Warrants

On June 27, 2024, in connection with their placement agent services, the Company issued 102,547 common stock warrants to Madison Global Partners, LLC, with a term of 5 years and an exercise price of $7.50 per share.

During the six months ended June 30, 2023, warrants were issued as a result of the following transactions:

The following is a summary of the Company’s warrant activity for the six months ended June 30, 2024 (unaudited):

Stock Options

During the six months ended June 30, 2024, the Company granted Mr. Kunal Mehta 13,282 options to purchase common stock at an exercise price of $7.78 per share. During the six months ended June 30, 2024, the Company also granted a total of 100,000 options to certain new employees at exercise prices ranging from $9.05 to $9.61 per share.

During the six months ended June 30, 2024 the Company agreed to accelerate the vesting of 6,511 options for Mr. Joe Trelin under the terms of his resignation with an exercise price of $5.48 per share. These accelerated options would not otherwise have vested prior to termination of service according to their Service conditions. Therefore, the Company recalculated the fair value of these options as of his resignation date of February 20, 2024 using the Black Scholes method.

The Company determined the grant date fair value of options granted for the six months ended June 30, 2024, using the Black Scholes Method, as applicable, with the following assumptions:

Activity related to stock options for the six months ended June 30, 2024 (unaudited), is summarized as follows:

The following table summarizes stock option information as of June 30, 2024 (unaudited):

During the six months ended June 30, 2024, the Company recognized approximately $1.5 million of stock option-based compensation expense. As of June 30, 2024, there was approximately $1.8 million of unrecognized compensation costs related to stock options outstanding that will be expensed through 2027.

On May 24, 2024, the Board of Directors adopted the 2024 Equity Incentive Plan (the “2024 Plan”). On June 26, 2024, the stockholders approved and ratified the 2024 Plan and the allocation of 395,000 shares of Common Stock to the 2024 Plan, in addition to the remaining shares not allocated to awards under the 2021 Equity Incentive Plan and any shares, which become available as a result of the forfeiture, or cancellation of any previous awards. As of June 30, 2024, there were 444,115 shares allocated to and available for issuance of awards under the 2024 Plan but no such awards have yet been granted.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Legal Matters

From time to time the Company is a party to various legal or administrative proceedings arising in the ordinary course of our business. While any litigation contains an element of uncertainty, we have no reason to believe that the outcome of such proceedings will have a material adverse effect on the financial condition or results of operations of the Company.

Leases

The Company has no remaining lease agreements as of July 2023.

NOTE 8 – SUBSEQUENT EVENTS

In July 2024, the Company evaluated the rollout timelines for several customers who have delayed go-live adoption dates due to their respective corporate processes and timelines. The Company has come to a verbal agreement with one customer (who comprises $1.3 million of the Company’s RPO) to modify the terms of their contract to defer the timing of their minimum payment obligations by approximately 12 months. The Company expects this modification agreement to be finalized during the quarter ending September 30, 2024, resulting in a reduction in the future periodic recognition of the revenue associated with this performance obligation through the end of the initial contract period, December 31, 2027. The proposed modification is not expected to affect the overall RPO associated with this customer’s contract.

In August 2024, the Board adopted a new policy on compensation for non-employee directors, which is summarized as follows

Each non-employee director will receive:

In accordance with this new policy, each non-employee director will receive an option grant of 15,627 shares, on the third day after the announcement of the Company’s results for the period ended June 30, 2024, at an exercise price equal to the closing price of the common stock on the NASDAQ Stock Market on that day.